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Topic: Economy
Region: Russia
Type: Member Comments
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Yaroslav Lissovolik

Chief Managing Director of Sberbank, Head of analytical Department of global markets Sberbank Investment Research, RIAC Member

Throughout this year there appear to be increasing signs of a paradigm shift in Russia’s economic policy associated with a move from an overarching emphasis on securing macroeconomic stability to attaining higher growth. The epicenter of these discussions is the theme of Russia’s National projects – Rb 25,7 trn in size over a period of 2019-2024 – whose implementation is set to be accompanied by a significant increase in fiscal spending in key priority areas such as infrastructure and human capital development. The theme of greater fiscal loosening in recent weeks was accentuated by Economy Minister Maxim Oreshkin who noted the need to prioritize economic growth and called for allowing regional budgets to exhibit higher deficits in order to allow for measures to expand investment. 

Throughout this year there appear to be increasing signs of a paradigm shift in Russia’s economic policy associated with a move from an overarching emphasis on securing macroeconomic stability to attaining higher growth. The epicenter of these discussions is the theme of Russia’s National projects – Rb 25,7 trn in size over a period of 2019-2024 – whose implementation is set to be accompanied by a significant increase in fiscal spending in key priority areas such as infrastructure and human capital development. The theme of greater fiscal loosening in recent weeks was accentuated by Economy Minister Maxim Oreshkin who noted the need to prioritize economic growth and called for allowing regional budgets to exhibit higher deficits in order to allow for measures to expand investment. 

This shift in priorities in our view is likely to become more pronounced going forward and is in line with the international trends observed in other emerging markets that are looking to boost growth through large-scale investment projects (C. Rammelt, 2018). In Russia’s near abroad such an undertaking was recently performed by Kazakhstan with its set of projects targeting infrastructure development (Nurly Zhol), with palpable implications for the growth in investment and the broader economy. This paradigm of large-scale investment as a gateway to attaining higher growth featured prominently in past experiences of developing economies with the theoretical underpinnings of such a policy shift advanced under the guise of the “Big Push” theory. 

The “Big Push” theory of economic modernization was developed by Rosenstein-Rodan in the 1940s and then pursued across a number of developing economies, some considered to be successful – like South Korea and Taiwan, while cases of large-scale public investment efforts in Africa proved to be less encouraging. According to Rosenstein-Rodan, “there is a minimum level of resources that must be devoted to … a development program if it is to have any chance of success. Launching a country into self-sustaining growth is a little like getting an airplane off the ground. There is a critical ground speed which must be passed before the craft can become airborne. …’ “Proceeding ‘bit by bit’ will not add up in its effects to the sum total of the single bits. A minimum quantum of investment is a necessary, though not sufficient, condition of success. This, in a nutshell, is the contention of the theory of the big push.”   

In other words within the “Big push” theory for the growth to be elevated to a higher level a wide range of sectors need to sustain this effort, which in turn necessitates large-scale investment from the state. The growth impulse in turn is to be propelled in part by positive spillover effects across industries and the catalytic role of state investment for private sector involvement in economic projects. In effect, growth is seen as being a result of building a sufficiently extended network of supporting industries/activities, with the state playing a key role in creating the conditions for the “Big Push”.   

What is important in Rosenstein-Rodan’s definition of the “Big Push” paradigm is the reference to large-scale investment as a necessary, but not a sufficient condition for the success of the modernization effort. What may be lacking in unsuccessful cases is the capability of the state to undertake productive investment, an institutional framework of targeted and efficient fiscal spending that is supported by public-private partnerships (PPPs). The slow pace of the implementation of the initial stages of the implementation of Russia’s National projects does suggest that institutional bottlenecks are still to be addressed in order to raise the speed and the potential dividends from the implementation of large-scale state investment. 

Another insight coming from the “Big Push” theory is the importance of complementarities across sectors that receive large-scale investment from the state. Rather than a set of separate sectoral investment spurts, an inter-connected effort across sectors that strengthens positive cross-sectoral spillover effects has a greater chance of delivering a strong enough growth impulse. Accordingly, rather than a mere wish-list of separate projects to be financed, a comprehensive strategy that targets stronger complementarities across sectors and different strands of National projects is in order. This may be particularly important for the design of large-scale infrastructural projects that are financed by the state. 

And then there is of course also the issue of how ephemeral the effects of large-scale state investment may be if they are not supported and sustained going forward by private sector participation. Russia’s own experience with large-scale projects in the regions (Winter Olympics in Sochi, World Cup 2018) suggests that without such an investment from the private sector growth rates may revert back to lower levels. This in turn implies that for the success of the National projects a broader reform effort accompanied by an improvement in the investment climate is crucial. 

Even when factoring in uncertainties regarding the efficiency of investment, the sheer quantity of the investment effort via Russia’s National projects is likely to have material macroeconomic and market implications in the coming years. The market implications of the “Big Push” paradigm are likely to be focused on sectors that benefit from investment-led growth and the development of infrastructure. These may include transportation (most notably ports and railway networks) as well as steel/construction materials. Another dimension is the set of National projects in the area of human capital development, including health care.


Source: Valdai Discussion Club

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